If Silvio Berlusconi couldn’t set off a Eurozone crisis, then there is little chance that Cyprus will.
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Is this reasoning a little on the simplistic side? Yes. But that doesn’t mean it isn’t completely true.
For anyone not up to speed on the matter, Cyprus is days away from national bankruptcy and systematic bank failure unless they come to an agreement with the “Troika” of the European Commission, the European Central Bank and the IMF. How did they get into this mess? Essentially, Cyprus’ massive banking sector borrowed heavily and used the proceeds to buy Greek government bonds, among other questionable investments. Cyprus also happens to be a convenient place for wealthy Russians to dodge taxes and launder money; about 25% of the deposits in Cypriot banks belong to Russian nationals.
Germany and the rest of the EU has a hard time asking their taxpayers to guarantee the deposits of shady Russian billionaires, which is essentially what they would be doing if they bailed out Cyprus. This is why they demanded that Cyprus fund part of the bailout with a levy on uninsured bank deposits (i.e. deposits not covered by Cyprus’ equivalent of the FDIC).
The Cypriot parliament vetoed the deal…which brings us to today. The ECB gave Cyprus an ultimatum to reach a deal with its lenders by Monday…or the emergency liquidity funds being provided to its banks would be cut off.
Suffice it to say, it’s going to be a long weekend in the Eastern Mediterranean.
And this brings me back to the opening lines of this post. The indecisive Italian election last month, in which a resurgent Silvio Berlusconi prevented the market’s preferred center-left coalition from getting a majority, caused a few days of market volatility. But it most certainly did not cause the Eurozone to collapse into crisis again. And likewise, the Cyprus standoff—which may well result in Cyprus ditching the euro—has caused a few days of volatility but little else.
Call it the “Draghi put” or call it crisis fatigue, but the message is clear. A year ago, this would have caused a massive market crash and fevered speculation that the Eurozone was coming unwound. But today, the market has stopped reacting to bad news. And that is unambiguously bullish.
I wouldn’t touch Cyprus with a ten-foot pole right now. The country’s banking system will probably be wiped out before all is said and done, and it’s far too early to try your luck at bargain hunting. But I would take the recent volatility as an opportunity to accumulate shares of blue chips in Spain and Italy.
One stock in particular that I like is Spanish banking giant Banco Santander (NYSE:$SAN). Santander is a solid bank with an international deposit and lending base. If you believe, as I do, that the Eurozone is stable for now, then Santander is a steal.
Action to take: Buy shares of Banco Santander. Plan to hold for 12-18 months or for total returns of 100% or more. Set an initial stop loss near the November lows just below $7.00.
This article first appeared on TraderPlanet.
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